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relief purposes and essential public projects as provided in (ii) above. The aggregate amount of moneys available for expenditure for emergency relief purposes and essential public projects only, including payments under (ii) above, shall not exceed the sum of $5,000,000 at the end of any fiscal year. Any unobligated or unexpended balance of the Federal contribution remaining at the end of a fiscal year which would cause the moneys available for emergency relief purposes and essential public projects only to exceed the sum of $5,000,000 shall thereupon be transferred and paid over to the Treasury of the United States as miscellaneous receipts."

(c) Section 42 of the Trade Mark Act of 1946 (60 Stat. 440, 15 U. S. C., 1952 edition, sec. 1123), and section 526 of the Tariff Act of 1930 (46 Stat. 741, 19 U. S. C., 1952 edition, sec. 1526), shall not apply to importation into the Virgin Islands of genuine foreign merchandise bearing a genuine foreign trademark, but shall remain applicable to importations of such merchandise from the Virgin Islands into the United States or its possessions; and the dealing in or possession of any such merchandize in the Virgin Islands shall not constitute a violation of any registrant's right under said Trade Mark Act.

(d) There shall be levied, collected, and paid upon all articles coming into the United States or its possessions from the Virgin Islands the rates of duty which are required to be levied, collected, and paid upon like articles imported from foreign countries, and the internal revenue taxes imposed by section 3350 of title 26, United States Code : Provided, That all articles, the growth or product of, or manufactured in, such islands, from materials grown or produced in such islands or in the United States, or both, or which do not contain foreign materials to the value of more than 50 per centum of their total value, upon which no drawback of custom duties has been allowed therein, coming into the United States from such islands shall be admitted free of duty. In determining whether such a Virgin Islands article contains foreign material to the value of more than 50 per centum, no material shall be considered foreign which, at the time the Virgin Islands article is entered, or withdrawn from warehouse, for consumption, may be imported into the continental United States free of duty generally.

Mr. ABBOTT. Section 28 (a), (b), (c) and (d) contains fiscal provisions with respect to the Virgin Islands. The panel members present are undoubtedly familiar with the fact that a number of measures have been introduced in the 84th Congress which would amend the provisions of section 28 and (b) particularly, that is, those provisions which authorize, just as the 1936 act did, the retention of revenues of customs, the United States income tax, any taxes levied by Congress, and so forth, at the local level.

Similarly, the provision contained in the 1954 act setting up the drawback of the Virgin Islands of Federal taxes paid in the mainland on goods or articles imported from the Virgin Islands, your so-called Federal drawback provision.

As members and the panel are aware, the so-called (ii) provision, which provided for an additional 2-year United States contribution for emergencies and public projects expired by its own operation with the end of fiscal year 1956.

With that brief background, I would like to begin with Senator Merwin.

Before I do, of course, you people here have seen publicity on the mainland respecting the so-called tax loophole. I believe members here have stated that is not their perspective necessarily, but it is the view of some individuals that there exists a so-called tax escape provision in the organic act itself.

Senator Merwin.

Mr. MERWIN. This whole matter, sir, is rather complicated, and I do not want to deal with it briefly.

Insofar as the (ii) funds are concerned, I would like to comment on that first. I do not believe that an amendment to the organic act is

necessary in this regard except insofar as I feel that we would be well benefited by having the same benefits as Puerto Rico in the return of all the internal revenue such as they enjoy, from the point of view of one territory enjoying, the other not having the benefit of it.

If there were to be an amendment to the act, that would be, I think, what I would like to see, because these islands have been getting worse and worse in condition all through the years due to the lack of money for roads and other necessary improvements. I do not know what the extent of those funds would be over the years, but I do know that our islands could well stand additional funds to improve the main functions of roads and harbors and other things.

I do not know what the proper procedure would be in that regard. Mr. ABBOTT. As far as (ii) is concerned, it would require an extension of the (ii) provision, would it not?

Mr. MERWIN. That is right.
Mr. ABBOTT. Are you recommending that now?
Mr. MERWIN. Yes, sir; I would like to see the (ii) funds extended.
Mr. ABBOTT. Indefinitely or for a fixed period ?

Mr. MERWIN. If we could get it for a fixed period of 2 years or 3 years, at least, we could then see where we could go from there, sir.

I do feel we do need more moneys than we can raise locally to get ourselves back in shape. If we are going to have tourism and so forth, we must have roads and proper facilities, transportation and airports, docks, harbors, and so forth; and it is going to take many millions of dollars to do that. We do not have the potential of commerce and industry here to enable us to raise those revenues.

Over the long run it might be a waste of Federal money to just have that extended indefinitely but I feel if we could have the benefit of it for a few years and reassess the situation 2 or 4 years from now we could then see how far we have progressed in developing our tourism, and how far we have progressed in reassessing the value of lands and properties, and how able we might be at that time to run our government on our local funds, plus the matching funds, and possibly have moneys left over at the end of each fiscal year to put into improvements.

I would urge at least that the Congress consider extending that for 2 or 4 years. I believe that in asking the Government of the United Stats for help we should be reasonable in all things and not just try to come in here and grab all the American taxpayers' money we can get our hands on. I think we should recognize our responsibility and ask for help in as reasonable a fashion as possible. We want to help ourselves and yet not be harmful about it.

Insofar as the the tax exemption program is concerned, I do feel we should have an opportunity to develop a sound tax exemption proyram in the islands, such as could be designed to attract different forms of activity.

I feel that, within the Virgin Islands, if we are left for another souple of years with the responsibilities to develop locally such a tax exemption program as will not result in large loopholes developing and large sums of money being taken outside of the Treasury of the United States and diverted from the United States Treasury, it would be more desirable to leave with us that responsibility.

I do not believe, in Washington, with all due respect to the fine staff's available to the Congress and the combined wisdom of the Congress, that it would be very feasible for you to devise for us a tax exemption program there that would be adaptable to our particular needs, because we do have a very intricate situation here.

I think that the program we have right now is not workable. I think it endeavors to give to the beneficiaries too large subsidies. I think we would have to give it local study and devise a program that could give tax rebate benefits on a reasonable basis and attract the necessary capital to the islands.

Mr. ABBOTT. Senator Merwin and the rest of you gentlemen on the panel, the proposition is perhaps this:

In section 28 (a), it is provided that inhabitants of the Virgin Islands may satisfy their income-tax obligations under applicable taxing statutes of the United States by paying their tax on income derived from all sources both within and outside the Virgin Islands.

What I have just extracted from that section is the nub of the problem as this committee must view it. It raises squarely this proposition which is submitted to you people for comment:

Should Congress amend that in such manner as to reflect a Federal policy, not dipping into what program might be worked out locally, so that any internal operation from income derived from within the Virgin Islands or from export from the Virgin Islands to the mainland, for example, would be within the control of the legislature!

But, as it now stands, the so-called tax loophole—the Wall Street Journal, the Journal of Commerce, and other trade publications have commented on it. The committee staff has had dozens of inquiries in Washington, and I am sure there have been inquiries here.

It may be, as has been argued on St. Thomas, that it should be left to the legislature to realine the existing tax program. But so long as the language in the organic act reads, “both within and outside the Virgin Islands," the temptation will be there. And by "temptation,'' that is also in the subjunctive—if a loophole exists to take advantage of.

Mr. MERWIN. Could we leave it this way? I would recommend this, sir: That the act not be changed, but that we understand from the visit here the position of the Congress of the United States, the concern of the Treasury Department over the possibility of funds being diverted from the United States Treasury, and that, if then in the next 2 years the Legislature of the Virgin Islands and the government does not undertake its own tax revision program which would limit tax exemption to sources of local income, then the Congress would see fit in 2 years to do something about it.

Mr. ABBOTT. Senator, I did not intend, and I am sure the Members would not-the Congress and these Members are undoubtedly interested in one thing, and that is to improve the economic status of the islands. It is not to say that a program would not be agreeable to the Congress which would involve income earned outside the Virgin Islands on some basis. So, what you have just stated, it would not have to be. As I understand it, it certainly is not, for example, in all respects true in Puerto Rico. But the proposition, and you have touched on it: Should the Congress leave the act the way it is, relying on the activity of the legislature? Or should the Congress amend its language to clearly establish the limits within which the local legislature may work?

Mr. O'BRIEN. May I say, Senator, I think it is a matter of some urgency. You mention perhaps within 2 years the legislature might

draw an act which would eliminate the loopholes. I would suggest a shorter period, because Congress has been confronted with a very definite storm warning. We have been told there is a grave possibility that a major loophole exists. So the Treasury Department could not stand it that long, nor could we after being warned by the Treasury Department.

So I would urge, if we do follow the procedure of permitting the legislature to correct the situation, that it be done quickly in the matter of self-government. For one thing, you would be doing it yourselves, and at the same time you would remove us from a very difficult position.

Mr. ASPINALL. Mr. Chairman?
Mr. O'BRIEN. Mr. Aspinall.

Mr. AsPINALL. Am I to understand by the word "quickly” you mean within the early part of the session of the coming islands legislature assembly? Because if they do not, it would be beholden upon the Congress to take cognizance of this before we adjourn the first session.

Mr. O'BRIEN. I think Mr. Aspinall has stated it very clearly and quite bluntly: That unless the legislature—and we are not going to coerce or bludgeon the legislature in any way, because I think it can be done this session-unless the legislature does do something of its own volition this coming session, then Congress, which still will be in session after adjournment, may be compelled to take action of its own.

Mr. MERWIN. I cannot, naturally, as one person commit the legislature to anything. I am not presuming so to do. But I feel we have aired the problems and placed the alternative. We know from our discussion here and our deliberations where we stand and that we are put on notice as to what the alternatives are.

I only urge that, insofar as I look at it and I am asked for my comments, we be permitted the opportunity-whether we are willing to go ahead and assume it or not-be permitted the opportunity to try to fix it up locally first. If we fail, then, of course, the Congress has stated its position.

I am not committing anybody; I am only stating my views.

Mr. O'BRIEN. I hope you understand our position. It is not a question of coercing the legislature at all, because we do not want to do that. It is just that we have a problem, and if you do not help solve it, we are going to have to. Mr. MERWIN. You are on the spot. Mr. O'BRIEN. Very much so. That is a good way to say it.

Mr. MERWIN. We put you there. And you say if we take you off the spot, you will do nothing; if we leave you there, you will take yourself off.

Mr. ABBOTT. Mr. Young.

Mr. Young. Mr. Abbott, it is my opinion that section 28 (a) and the particular portion that you quoted to us is not necessarily a tax loophole as such. The word "inhabitant” is the one word we all have doubts about. Can a corporation, a holding company, be an inhabitant of the Virgin Islands when all of its stockholders and directors are residents of New York, for example?

My opinion is that all citizens of the United States still owe their income tax obligation to the United States by virtue of the Internal Revenue Code. The fact that the Virgin Islands Organic Act permits an inhabitant of the Virgin Islands to pay his taxes to the Virgin Islands no matter where his income has been earned is not controlling if the Internal Revenue Department says an inhabitant of the Virgin Islands must be one who lives down there 6 months and a day, for example.

We might say there is a possibility of a tax loophole, but we still have to face the Internal Revenue Department, and it is because of this that I, as an attorney in the Virgin Islands, have turned down many people who want to come to the Virgin Islands to live, to buy their stocks and bonds, for example, in the Virgin Islands to take advantage of our so-called tax exemption program. But we cannot assure them under the present law that they can qualify as an inhabitant of the Virgin Islands.

I do not think we have to amend our organic act, either, to do that; that can be done by Congress in its usual and regular appraisal of its own Internal Revenue Code.

Congress can say, “We think that an inhabitant of the Virgin Islands is one who lives there 6 months and a day or one who spends at least 4 months there."

Dr. MILLER. It seems to me there has been some ruling by the Treasury Department on the question of who is an inhabitant. I am not sure whether their representative can shed any light on that or not. It might be well to have it in the record at this point.

Mr. O'BRIEN. I might say I think we will do that in view of the fact we do have a gentleman here from the Treasury Department, Mr. Sherfy, who knows the subject inside out.

I would like to emphasize that any statement he may make is not a policy statement. He is in a position only to say what certain things would do in his opinion under existing law or proposed law.

I might add before we hear from Mr. Sherfy, if you do sit down quickly to this task of writing a law without loopholes, you will not be operating alone. I am very sure the Treasury Department will cooperate, because the Treasury Department from its actions in our committee is only desirous to eliminate a loophole. I am sure the Treasury Department does not care where it is eliminated as long as it vanishes.

Mr. Sherfy. STATEMENT OF RAY SHERFY, REPRESENTING THE TREASURY

DEPARTMENT OF THE UNITED STATES Mr. SHERFY. Mr. Chairman, Dr. Miller has suggested that the subcommittee might be informed as to the position of the Internal Revenue Service with respect to the definition of permanent inhabitant, and he stated it was his understanding that the Internal Revenue Service has taken such a position.

Mr. Chairman, as I understand the law, the congressional committees are able to obtain tax information from the Internal Revenue Service. There are procedures through which you must go under the code and we do it all the time.

I also suggest that you may not want for me to discuss individual rulings at this time. I will talk generally, however, on the subject.

Mr. O'BRIEN. That will be agreeable.
Mr. HODGE. Mr. Chairman?

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